This Week In Securities Litigation (Week of February 20, 2023)
The Commission brought actions centered on touting, manipulation, an offering fraud and a financial fraud in then period leading up to the President’s Day Weekend.
Be careful, be safe this week
SEC Enforcement – Filed and settled actions
During the last week the Commission filed 4 new civil injunctive actions and 2 new administrative proceeding, exclusive of 12j, default, conflicts (which are included in the tabulation of cases), tag-a-long and other similar proceedings.
Touting: In the Matter of Paul Anthony Pierce, Adm. Proc. File No. 3-21305 (February 17, 2023) is an action which names as respondent the former professional basketball player. Over a brief period from late May to June Respondent touted a crypto asset and at least made negligent statements that were not correct. He also failed to disclose that he was being paid. The Order alleges violations of Securities Act Sections 17(a)(2) and 17(b). Respondent settled the matter, agreeing to certain undertakings and consenting to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, he agreed to pay disgorgement of $244,116, prejudgment interest of $15,449 and a penalty of $1.5 million.
Manipulation: SEC v. Patel, Civil Action No. 2:23-cv-0026 (N.D. Ga. Filed February 16, 2023) is an action which names as defendant Milan Patel, one of several men who received false rumors about stocks to distribute as part of an effort to influence select stock prices temporarily. Mr. Patel is alleged to have spread such rumors 100 or more times. On receipt of the rumors Mr. Patel furnished them to financial news services, financial chat rooms, certain financial news purveyors, instant messagers and others. During the period of late December 2017 through early 2020 when he disseminated the rumors, Defendant is alleged to have earned $1,125,263 in ill-gotten gains. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25641 (February 16, 2023).
Offering fraud: SEC v. Terraform Labs PTD, Civil Action No. 1:23-cv-1346 (S.D.N.Y. Filed Feb. 16, 2023) named as defendants Terraform Labs and Do Yeong Kwon, a private firm based in Singapore that sold crypto securities through a website and Mr. Kon, its decision maker. Over a four-year period, beginning in April 2018, Defendants offered and sold crypto asset securities in unregistered transactions and executed a scheme that caused a $40 billion in market value loss for U.S. investors. Defendants’ crypto assets involved an array of investments. In April 2022, for example, Defendants promised that a “yield-bearing” blockchain protocol called Anchor Protocol would pay 19 – 20% interest. Two years later the LUNA token had a market value that was among the ten highest in the world for crypto assets. Likewise, its “stablecoin” — Terra USD (or UST) — was supposedly pegged to the U.S. Dollar. That ratio was maintained, however, only through significant efforts to initially hold the price. Later, without those efforts the coin crashed. Defendants also told investors that a payment application called “Chai” had a breakthrough application for Terraform Blockchain such that real-world uses that could increase the value of LUNA as demand for the token rose in connection with increased use of the Terraform blockchain. In fact, the claim was false. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 6(1) and 10(b). The case is pending.
Offering fraud: SEC v. Kikrchner, Civil Action No. 4:23-cv-147 (N.D. Tx. Filed February 14, 2023). Defendant Christopher Kirchner is the co-founder of Slync Inc. and served as the firm’s CEO. Over a period of about 15 months, beginning in January 2020, Defendant raised $67 million for the Company in two rounds of capital fund raising. The first round involved the issuance of Series A Preferred Stock. The second round involved the issuance of Series B Preferred Stock. To market each Series, Defendant used a series of misrepresentations which included false statements about the use of the investor proceeds, the development of the company and its growth. Following the completion of the second round of financing, Defendant began siphoning off the investor capital. Significant portions of the investor capital were transferred to his personal bank account. Defendant also used firm funds to pay for personal expenses. Overall, Defendant diverted about $28 million of the $67 million raised for the company by defrauding investors. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10b). The case is pending. The U.S. Attorney’s Office for the Northern District of Texas filed parallel criminal charges. See Lit. Rel. No. 25639 (February 14, 2023).
Financial fraud: In the Matter of Roadrunner Transportation Systems, Inc., Adm. Proc. File No. 3-21301 (February 14, 2023). Respondent is a shipping and logistics firm based in Cudahy, Wisconsin. Roadrunner’s stock was listed on the NYSE and registered with the Commission. In 2020 the company filed a Form 25 withdrawing its common stock from listing. Subsequently, Roadrunner terminated its registration. Roadrunner acquired over twenty transportations firms over a seven-year period, beginning in 2010. Each company was consolidated into Roadrunner. The financial results of all the firms were consolidated into Roadrunner’s financial statements. The company manipulated its financial results over a four-year period, beginning in mid-2013, according to the OIP. Roadrunner engaged in a fraudulent scheme to conceal major expenses, hide poor performance and avoid write-offs of impaired assets. The focus of the scheme was to meet earnings goals. The scheme began when Roadrunner acquired Operating Company. The deal papers called for Roadrunner to pay the sellers an earnout that was contingent on the acquired firm’s future performance. The impact of the calculation depended on the performance of the acquired firm. Under GAAP Roadrunner was required to remeasure the fair value of the earnout at each reporting date. If the Operating Company could not meet the annual EBITDA thresholds to trigger the payment of the full earnout amount there were two effects: a) it provided a short-term boost to net income but b) a signal to investors the acquired firm was not meeting the EBITDA projections required by the deal. To avoid the latter, the numbers were manipulated. Over a four year period Roadrunner continued to alter certain financial metrics to avoid revealing that some properties were not performing as expected. At various times the firm hid major expenses, concealed poor performance and avoided required write-offs. In early 2017 Roadrunner announced in a Form 8-K that it had commenced an investigation. Discrepancies were uncovered and reported to the audit committee. The next year the firm announced the conclusions of the inquiry. Roadrunner terminated those responsible for the scheme, installed new controls and shared the findings from the investigation with the Commission. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited. The firm also agreed to pay disgorgement of $7,096,092 and prejudgment interest of $2,539,819.71. Payment was satisfied by paying $20 million to a parallel class action, $16 million of which was distributed to the shareholders.
Fraudulent representations: SEC v. Reliable One Resources, Inc., Civil Action No. 6:23-cv-6 (E.D.Tx. Filed January 6, 2023) is an action which names as defendants Reliable One, Quantum Filtration, Inc., Clyde Cravey and Kenneth Wiedrich. The two individuals controlled the entity Defendants and tried to conceal the involvement of Mr. Cravey who had a checkered past that included a fraud judgment under the Texas Securities Act. The complaint alleges that since February 2015 Defendants had raised about $34 million from over 500 investors through the fraudulent offering of Reliable One shares. Defendants claimed that they were about to receive FDA approval for the sale of masks that protected against COVID. In fact, they were not. Defendants also mislead investors regarding other aspects of the offering. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Defendants agreed to a partial settlement under which permanent injunctions were entered based on the Sections cited, a penny stock bar, an officer director bar and a freeze order. A preliminary injunction was also entered against each of the entity Defendants. Monetary remedies will be considered at a later date.
Consultation: The Securities and Futures Commission of Hong Kong is consulting on proposals to regulate virtual asset trading platforms, according to a February 20, 2023 release (here).
Consultation: The Monetary Authority of Singapore launched a Third Consultation on Green and Transition Taxonomy, on February 15, 2023. This will be the final consultation on a green and transition taxonomy for Singapore based financial institutions. The consultation seeks views on the detailed thresholds and criteria for the classification of green and transition activities in five sectors (here).
Views: The Financial Conduct Authority or FCA is seeking views on updating asset management regulations, according to a release issued on February 20, 2023 (here).